Commodity Terms-of-Trade Shocks and Monetary Policy in a Monetary Union of Developing Countries

Abstract

Many low-income countries (LICs), especially in sub-Saharan Africa, are commodity dependent. Commodity terms-of-trade volatility poses a challenge for monetary policy in these countries, as they have important effects on domestic inflation, among other things. For LICs belonging to monetary unions, like WAEMU and CEMAC, the impossibility of resorting to exchange rate adjustments makes the monetary policy response to such shocks even more complicated. This project explores the optimal monetary policy in the presence of commodity terms-of-trade shocks in a monetary union, with application to WAEMU and CEMAC.